If you’ve received a tax refund this year, it’s more than a windfall – it’s a chance to improve your long-term financial position. But should you prioritize reducing debt or accelerating your investment growth?
“There are benefits to both approaches,” says Dave Lee, Senior Wealth Advisor at Scotia Wealth Management in White Rock. “The key is to find the strategy that aligns with your financial priorities and long-term objectives.”
Paying down your mortgage
For homeowners focused on becoming debt-free, putting surplus cash flow toward mortgage payments can be a strong financial move.
-
Save on interest: Paying off your mortgage early reduces the total amount of interest paid overtime, especially with high-interest rates.
-
Guaranteed return: While investments can fluctuate, reducing debt is always a safe choice.
-
Peace of mind: Owning a home outright provides financial security and removes the burden of monthly payments.
However, with mortgage rates currently lower than historical investment returns, some homeowners may earn more by investing instead.
Investing in a TFSA or RRSP
For those looking to grow their wealth, investing extra funds can be an attractive alternative.
-
Higher potential returns: A well-diversified investment portfolio can yield returns that exceed most mortgage interest rates.
-
Tax advantages: RRSP contributions lower taxable income, while TFSA investments grow tax-free, making them valuable wealth-building tools.
-
Increased liquidity: Unlike home equity, many investments can remain accessible on short notice.
“Investing can be a smart choice if your returns outpace your mortgage interest rate,” Dave says. “Plus, tax-advantaged accounts help maximize long-term gains.”
Choosing the best option for you
When deciding between mortgage prepayments and investing, consider:
-
Your interest rate: If mortgage rates are low and investment returns are strong, investing may be the better choice.
-
Risk tolerance: Mortgage repayment is a sure thing, while investments with strong long-term potential will fluctuate and have periods of negative returns.
-
Retirement goals: If maximizing retirement savings is a priority, contributing to an RRSP or TFSA may provide greater benefits.
-
Cash flow needs: Paying down a mortgage reduces fixed costs, while investing keeps funds accessible.
“This time of year, is ideal for reviewing how your tax refund fits into your larger financial picture,” Dave says. “Integrating debt, investment and tax strategy considerations can yield long-term benefits, especially if you’re in a high-income bracket or approaching retirement.”
Before making a decision, consult a professional who can help assess your unique situation.
For more information, contact Senior Wealth Advisor, Dave Lee CIM, CFP, FCSI, at Scotia Wealth Management in White Rock by email at dave.lee@scotiawealth.com or by phone 604-535-4743.
Read more from Dave Lee online at www.dave-lee.ca/publications